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Franchise Law Update

Commentary on Business and Legal Issues of Franchising

In Wake of McDonald’s, GOP Senate Proposes Bill to Restructure National Labor Relations Board

Posted in Legislative Updates

A new bill was introduced by Senate Republicans this week which aims to reform the structure of the National Labor Relations Board (NLRB).  Among other changes, the bill, called the NLRB Reform Act, would require the NLRB to have 6 board members of which 3 must be Republicans and 3 must be Democrats–similar to the make-up of the Federal Election Commission.   Currently the NLRB is comprised of 5 members (and, while the split is currently 3 Democrats and 2 Republicans, members are appointed by the President to five year terms upon the consent of the Senate).   In addition to changing the composition of the board, the NLRB Reform Bill would cut the budget of the NLRB if the board is not able to decide 90 percent of its cases within a year and expedite the process by which a party can appeal a NLRB General Counsel complaint to the Federal Courts. Notice, too, that this bill would eliminate the possibility of independent representation on the NLRB.

The NLRB has received a lot of press of late – both positive and negative – since its General Counsel opined that McDonald’s can be a joint employer with its franchisees this past summer. Opponents of the bill claim that an even split of board members along partisan lines would render the NLRB in constant gridlock and therefore useless at resolving important labor cases.  Proponents of the bill, including the International Franchise Association, claim that the bill is necessary to eliminate and change the NLRB “from an advocate to an empire.”  It is unlikely that the NLRB Reform Act will move forward given the Senate’s current composition but we be watching for any developments especially if the next election changes the Democratically controlled Senate.

Franchisor Is Not the Employer of Franchisee’s Employee under the FLSA, so says the Fifth Circuit Court of Appeals

Posted in Legal Decisions

Contributed by Christina Stoneburner

Plaintiffs have recently been stretching the limits of who is their employer for purposes of protection under state and federal employment laws.  We recently reported about a case against 7-Eleven where the Court refused to dismiss a complaint filed by the franchisee’s employees against the franchisor where the employees argued that the franchisor was, for purposes of the federal Fair Labor Standards Act (“FLSA”), their employer.

Determining who is an employer under the FLSA can be tricky and may depend on which circuit the case is brought.  A recent Fifth Circuit case may give some hope to franchisors.  In Orozco v. Plackis [PDF], No. 13-50632 (5th Cir. 2014), the Fifth Circuit Court of Appeals reversed a jury verdict and award for damages for violations of the FLSA entered against the franchisor and in favor of the franchisee’s former employer.

The Court used the “economic realities” test to determine if the franchisor could be a joint with the franchisee.  In holding that the franchisor was not an employer for FLSA purposes, the Court noted that the franchisor did not have the power to hire or fire the franchisee’s employees nor did the franchisor have control over the terms and conditions of the worker’s employment.

The interesting part of the decision for franchisors is that there was some evidence that the franchisor did provide advice to the franchisee which seemed to include a meeting where the franchisor advised how to reduce payroll through better scheduling. Immediately after this meeting, the franchisee changed the plaintiff’s schedule which is what led to the complaint.

The Court noted that it would expect franchisors to provide some advice to a struggling franchisee but providing this advice did not mean that the franchisor had control over the terms and conditions of the franchisee’s employees.   The key to this decision is that the evidence demonstrated that the advice provided by the franchisor was just that, advice, meaning it could either be taken or ignored by the franchisee.

However, franchisors should remain cautious when venturing into areas such as their franchisees’ workers schedules and salaries to be paid. Even friendly advice given often enough might be perceived by courts or jurors as mandatory rather than optional.

Best Practices to Avoid Hackers: Must Read for Franchisors and Franchisees

Posted in Business Updates, Industry Updates

Entrepreneur this week released its “Best Practices for Employees to Protect the Company From Hackers”. The article contains some great tips for franchise businesses to implement for avoiding data breaches through employee conduct.   This is critically helpful information during a time where major data breaches seem to pop up on the news every day.

So many articles discuss what businesses should do from a high level management perspective focusing on implementing sophisticated changes to technology, data collection and storage policies and practices.  In this article, however, the writer, Dick Anderson, focuses on what EMPLOYEES should do to protect themselves and their employers.

Mr. Anderson opens with a description of phishing exercises he conducts for clients where results show that 70% or more employees will follow a link to a bogus site and of those that follow the link, 30-50% give up their usernames and passwords!

Many of the tips should be common sense to most people such as making sure that employees are not using work computers for personal business and keeping browsers, and plug-ins (such as Adobe Flash or Java) updated.  The article also contains some lesser known recommendations and provides a blunt and honest look at how employees are an easy target for hackers looking to get past a company’s security controls.

To read the entire article on Entrepreneur.com, you can click here.

Get Your New ACA (aka Obamacare) Guidance Right Here

Posted in Regulatory Compliance

In its continuing efforts to provide guidance on the twice-delayed Patient Protection and Affordable Care Act (PPACA) provisions, the Obama administration released guidance last Thursday and draft forms instructing employers how to comply with the employer mandate under the PPACA. The 13-page draft instructions are posted on the IRS website.

Past delays in guidance has raised concerns that the employer mandate would be delayed a third time. Presently, employers with between 50 and 99 employees have until January 2016 to offer health insurance or pay and fine, and employers with over 100 employees have until January 2015. Employers with fewer than 50 employees are exempt.

The IRS documents include drafts of forms and related instructions for: Form 1095-A, the Health Insurance Marketplace Statement; Form 1095-B, Health Coverage ; and Form 1095-C, Employer Provided Health Insurance Offer and Coverage.


Vicarious Liability: Can We Breathe a Sigh of Relief after Patterson? (No)

Posted in Legal Decisions

It hasn’t been a great summer for the issue of vicarious liability in franchising. In particular, the Office of General Counsel of the NLRB, in its McDonald’s recommendation, has demonstrated that it is hostile to the franchising model of business. So many of us were rightly concerned about how the California Supreme Court would rule in Patterson v. Domino’s Pizza, LLC. [PDF].

The facts of the case are terribly unfortunate. Taylor Patterson obtained a job at a local Domino’s franchise in Southern California owned by a company called Sui Juris, LLC. Ms. Patterson alleged that a shift manager sexually harassed her whenever she and he shared the same shift. We can all agree that the alleged conduct was outrageous. Ms. Patterson claimed that the manager made lewd comments, and grabbed her breasts and buttocks. When the manager refused to stop, Ms. Patterson reported the conduct to the owner of Sui Juris and her father. She stayed away from work for one week. When she returned, she perceived that her hours had been cut in retaliation for reporting the harassment.

30014105_sPatterson’s father called a 1-800 customer complaint line set up by Domino’s and reported what had happened to his daughter. In this manner, one of the key factual issues in the case developed. As a result of that call, the information was passed to a Domino’s “area leader” for over 100 franchisees in Southern California. In discussing what had happened to Patterson with the franchise owner, the area leader allegedly told the owner, “You’ve got [to] get rid of this guy.” Importantly, the franchise owner testified that he saw no specific implication in the remarks of his area leader nor did he ask what would happen if he didn’t fire the manager. Ultimately, the manager stopped showing up for work, resolving the issue in the mind of the owner.

Nonetheless, the area leader’s statement became a significant issue in the case after Ms. Patterson sued, naming not just the franchisee but the franchisor as well. Domino’s sought summary judgment, stating that it was not an employer or principal of the manager, and that it could not be held vicariously liable as a result. The trial court agreed, but then the Court of Appeal reversed, holding that there was a triable issue of fact as to whether Domino’s was an employer or principal for vicarious liability purposes. The Court of Appeal seemed to give particular weight to the “get rid of this guy” statements of the area leader, along with the franchisee’s testimony that he followed her instructions.

The Supreme Court, after a careful and nuanced review of the franchising business model and vicarious liability law involving franchise systems, concluded that the trial court had been correct; Domino’s was not the employer or principal of the manager who committed the harassment of Ms. Patterson. The Court focused on the means and manner test: an agency relationship exists only where the principal dictates, not just the desired result of the enterprise, but also the manner and means by which the result is achieved. The Court held that a comprehensive operating system alone does not constitute the amount of control necessary to support vicarious liability claims like those raised by Ms. Patterson.

With respect to personnel issues, the Court found that Domino’s franchisees are owner-operators who hire and train the people who work for them, and who oversee the performance of those employees every day. In fact, in this Court’s view, a franchisor only becomes potentially liable for the actions of the franchisee’s employees if it retains or assumes a general right of control over factors such as hiring, direction, supervision, discipline, discharge and relevant day-to-day aspects of the franchisee workplace. Moreover, in reviewing the evidence, the Court found that Domino’s had no contractual authority to manage the behavior of employees and, in fact, that it did not have any such actual authority either. Domino’s was not involved in the application, review or hiring processes of its franchisees.  The franchisee was also solely responsible for training employees on how to treat each other at work and how to avoid sexual harassment.

So, a win for franchising? In the immediate term, yes. But I see significant potential long-term issues with the Supreme Court’s opinion. First, the Court essentially authored a roadmap for lawyers looking for ways to sue franchise systems on grounds of vicarious liability. Franchisors should take a hard look at their systems, training programs and operating manuals–particularly if they are operating in California–to absolutely ensure that they do not control the manner and means where agency could be an issue.  Second, training of regional representatives, area leaders, and the like should emphasize that business areas left to the franchisee’s control must be left to the franchisee’s control. While the majority opinion accepted the testimony of the franchisee that he saw no implication in the “get rid of this guy” statement, the Court of Appeals and especially the dissenters on the Supreme Court seized on this comment. Unless it is truly a branding matter, it is best that the franchisor’s representative stay out of the fray.

And that brings me to the third and most troubling issue. The dissenters, who would have found vicarious liability, pointed to the fact that the Domino’s area leader once told the franchisee in this case to have a manager stop using Domino’s-branded bags to deliver a competitor’s food as further evidence of Domino’s control over personnel decisions. Huh? That’s right: what seems like a clear branding matter to a franchise professional is a personnel issue to three members of the California Supreme Court. Now, let me add that the Supreme Court decision was 4 to 3. One person changes sides, and this is a completely different (and very troubling) decision.

Or Maybe We Won’t . . . (Heigl v. Duane Reade–Update)

Posted in Business Updates, Legal Decisions

A few months ago, I blogged about the complaint filed by Katherine Heigl against Duane Reade. Ms. Heigl complained that Duane Reade had improperly used a picture of her carrying bags from the drugstore chain snapped by paparazzi in posts at social media outlets like Twitter and Facebook. The allegation was that the photo and accompanying language amounted to an unauthorized celebrity endorsement of Duane Reade by Ms. Heigl.

To me, the case presented fascinating questions at the intersection of first amendment (free speech), social media and false advertising law. The picture of Ms. Heigel was taken in a public place, where celebrities generally have little privacy protection. On the other hand, the case was brought in New York which has significant protections for celebrity images used in advertising. Moreover, Duane Reade might have crossed a line when it copied the photo from a celebrity gossip site and removed the accompanying story.

Alas, however, we won’t be getting any legal answers on these issues from this case because Ms. Heigl’s attorneys have voluntarily withdrawn the lawsuit. While the terms of any settlement are confidential, according to media reports, Duane Reade will make an undisclosed contribution to the Jason Debus Heigl Foundation in exchange for the decision to end the case. As questions regarding the appropriate use of celebrity images in social media will continue to fester–and provide potential headaches for franchise social media managers–I’ll be on the lookout for additional cases which might provide answers.


UPDATE: California Senate Approves and Sends Franchise Act Amendment Bill to Governor

Posted in Legislative Updates

SB610, approved by California’s assembly earlier this month, was given final approval by the California senate late last week in a vote of 23-9 and sent to Governor Jerry Brown for signature to become law.

As we reported shortly after SB610′s approval by California’s assembly, the bill will amend the California Franchise Relations Act (Act) to make it more difficult for franchisors to terminate or fail to renew franchisees.  If signed into law by the Governor,  the Act will be amended to make it unlawful for a franchise agreement to:

  1. restrict the right of a franchisee to join a franchisee association;
  2. prohibit a franchisee from transferring a franchise to a qualified person or allow a franchisor to unreasonably withhold consent to a transfer;
  3. terminate a franchisee prior to the expiration of its term, except upon a substantial and material breach on the part of the franchisee of a lawful requirement of the franchise agreement; and
  4. terminate a franchisee for a  substantial and material breach without allowing 30 days to cure the breach.

SB610 is strongly opposed by the International Franchise Association which argues that approval of the bill will result in less individually owned franchises and more company-owned outlets in California.  You can read the statement issued  by the IFA after the bill’s passage here.  The bill was sponsored by the Southern California-based American Association of Franchisees and Dealers and supported by franchisees and labor unions such as the Service Employees International Union (SEIU) who argues that a shift in power to individual franchise owners will ultimately help workers.

Service Animal or Playful Pet? Complying with the American with Disabilities Act

Posted in Regulatory Compliance

This week a Florida restaurant made the wrong kind of news when a couple with service dogs was asked by the manager to leave the premises.

This isn’t the first time that a business has gotten bad press for refusing service to persons with animals. But what do you do in age where homeowners sue to keep service miniature horses in their homes in violation of city ordinances and passengers cart snakes onto buses and planes using the Americans with Disabilities Act (“ADA”) as a shield? Add in the new trend of emotional support pets, it can be hard for a business to know what it can legally prohibit.  How does a franchisee know when a customer has a genuine reason for being accompanied by an animal or is trying to circumvent a legitimate “NO PETS” policy?

Under the ADA a business is permitted only to ask the following questions of a customer or patron with a service animal:

  1. Is the animal required because of a disability?
  2. What task or service has the animal been trained to do?

This makes it hard for businesses to ferret out who is the “real deal.”  People can, and often do, lie.  Unfortunately, a business can’t try to verify the veracity of a customer’s statement. A business may NOT insist on any type of “proof” such as a state certification before permitting a service animal.  A business (such as a hotel) cannot charge a maintenance or cleaning fee for customers with service animals. The most important to thing to remember is a service animal is NOT a pet or treated as one under the law.

There are certain exceptions such as when an animal’s behavior poses a risk to other patrons (for example, vicious snarling) or if accommodating the service animal will result in a “fundamental alteration of the business” (for example, loud barking during a movie).

Almost every franchise agreement will have general language requiring that franchisees comply with all laws, regulations and rules governing the franchised business. In many cases, ADA compliance is specifically referenced in the franchise agreement. But it can be difficult for a small business to navigate the intricacies of these laws.

As franchise systems know, a single unlawful act by one franchisee — even if unintentional — can taint the whole brand if the story goes viral.  Therefore, a franchisor should consider doing the following:

  1. conduct periodic training sessions or seminars at your annual convention for franchisees on ADA compliance;
  2. ensure that your Operations Manual contains detailed requirements that management know how to obey and comply with these laws on a practical everyday level;
  3. remind franchisee management that it is their responsibility to ensure that all employees do not inadvertently violate the law; and
  4. keep updated on changes in the law.  In particular, the ADA was revised in 2011 to recognize only dogs as service animals.  This is not the case, however, under other laws such as the Fair Housing Act, Air Carrier Access Act or certain state or local laws. It is important to reach out to your legal counsel with compliance questions.

It is becoming more common to see these types of issues arise. In fact, a colleague practicing in animal law recently told me of a member of the audience in a seminar she spoke at who had a service spider! Smart franchise system must have plans in place so as to be prepared to deal with these issues.

Are You Ready for Smart Chip Credit Cards?

Posted in Business Updates

The Wall Street Journal today is reporting that US credit card issuers will distribute more than 575 million smart chip credit cards by the end of 2015.  That’s approximately one-half of the one billion credit cards in circulation in the United States. The distribution of chip cards–in wide use throughout the rest of the world–has been hampered in the US by a chicken-and-egg problem. Because the US consumer and retail marketplace were early adopters of credit card payment systems, the US has a massive infrastructure supporting the old-tech magnetic strip cards. Retailers have been unwilling to introduce the new technology until consumers have the chip cards in their wallets; banks have been unwilling to issue chip cards until consumers have a place to use them.

Now, spurred by massive data breaches involving credit cards like the one that hit Target last year (interestingly enough, Target was an early adopter of smart chip cards in the early 2000s but abandoned the effort after other retailers failed to follow suit), the tide has seemingly turned. The advantage of the chip card is that each transaction has a unique code attached to it, making a stolen credit card number alone useless to thieves. The WSJ article notes that the biggest retailer in the US, Wal-Mart, has installed the new technology at 4,600 of its stores and expects to complete the changeover at all 5,000 of its locations by year’s end.

Franchisors and franchisees will be on the front lines of this massive switchover to the new technology. And it sounds like both patience and some new employee training will be required. In particular, you do not simply “swipe” the new cards. Instead, they are inserted into the card reader and stay there until the transaction is completed. In some cases, moreover, the entry of a PIN will be required. While the switchover will probably entail some bumps along the way, smart chips are likely to become the industry standard for fraud prevention in the US, as they have in the rest of the world. Moreover, Visa and MasterCard announced that any actor–retailer or card issuer–without chip technology in place by October 2015 will bear the cost of fraud committed on their networks.  Therefore, adoption of and compliance with smart chip card technology will almost certainly become necessary for risk and liability avoidance in a short period of time.

Pennsylvania Based Franchise System Developing Marijuana Pizza Sauce

Posted in Business Updates

Last week I posted my opinion that I thought it was unlikely that 2014 has the potential to be the year of the marjiuana franchise.  I continue, however, to see more and more franchisors looking for22161705_l creative ways to incorporate marijuana into their systems in the almost two dozen states that permit the sale of marijuana for either medical or recreational use.

Unique Pizza and Subs is just one of those franchise systems.  The Pennsylvania based pizza franchise recently announced that it is in the process of developing a new “cannabis infused” signature pizza sauce.

There is no marijuana sauce yet on the menu but if the “marijuana infusion chefs” retained by the franchise system have any luck it won’t be long.  The press release states that Unique Pizza and Subs will work with local manufacturers to produce the product in compliance with all applicable state laws if and when it is developed.  There is no news yet on whether the pizza system intends to license the products to franchisees in states where medical or recreational use of marijuana edible products is legal.   Currently Unique Pizza and Sub has locations in Pennsylvania and Michigan and, of those two, only Michigan allows legal marijuana possession and then only for medical purposes.  There is no doubt that it will be interesting to see how Unique Pizza and Subs addresses the new and unusual franchise disclosure and relationship issues should it decide to move forward with licensing the product to its franchisees.